Lower Interest Rate – Higher Payment

Whether you’re refinancing your current home or buying a new one, something worth considering is a 15 year loan rather than a 30 year term. The payments will be a little higher but you’ll get a lower interest rate and you’ll build equity much faster.

Let’s look at an example of a $200,000 mortgage with the choice of a 30 year term with a 3.75% rate compared to a 15 year term with a 2.875% rate. The payments would be $442.94 higher on the shorter term but the equity would be considerably higher even after you adjust for the higher payments.

Another benefit is that the shorter term loan creates a forced savings situation where the savings on a longer term loan might end up being spent rather than being saved and invested. Contact me if you’d like a recommendation of a trusted lender.

Mortgage Interest Deduction

 

A recent U.S. Tax Court ruling clarified the IRS position that the $1.1 million limit for mortgage interest deduction applies per residence and not per taxpayer as some high-priced homeowners were hoping.

A married homeowner filing jointly can have fully deductible interest on a mortgage of up to $1,000,000 of acquisition debt and up to an additional $100,000 of home equity debt. If the married couple files separately, each party is limited to deducting the interest on half of those maximum amounts.

The court case came about when two unmarried individuals who owned a home together as joint tenants felt that they were entitled to deduct the interest on $1.1 million of debt each. IRS did not agree with their understanding and neither did the Tax Court. The Court ruled that the limits apply per residence, not per taxpayer even if a home is co-owned by unmarried taxpayers.

The result for the taxpayers in this case was that their deduction was cut in half resulting in much more income tax due. While this situation only affects a few taxpayers, homeowners in this position should have a discussion with their tax professional.